Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Sanjay Garg (JM)
O R D E R Per B.R. Baskaran (AM) :-
Both the appeals filed by the assessee are directed against the orders passed by learned CIT(A)-31, Mumbai and they relate to A.Y. 2007-08 & 2008- 09. Both the appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
Facts relating to the case are that the assessee is a partnership firm and it is engaged in the business of undertaking as civil and labour contract works. The Revenue carried out survey operation u/s. 133A of the Act on 2.2.2007. During the course of survey certain discrepancies were noticed. When they were put before the partner of the assessee, he accepted the discrepancies and agreed to offer a sum of ` 1 crore as income of the firm. The assessee discrepancies noticed at the time of survey are given below:-
2 M/s. Kalparishi Construction Co. a) Difference in valuation of work in progress ` 74,12,287 as on the date of survey b) Amount spent in cash on renovation ` 24,73,000 of office premises and furniture and fixture However, the assessee did not offer the additional income in the return of income filed for A.Y. 2007-08. Hence the Assessing Officer added both the amounts cited above to the income of the assessee. The Assessing Officer further noticed that the assessee has claimed shuttering material costing ` 4,57,14,039/-as revenue expenditure. The Assessing Officer treated the same as capital expenditure and accordingly disallowed the said claim in excess of admissible depreciation. In the appellate proceedings the assessee got partial relief and hence the assessee has filed these appeals.
We shall take up the appeal filed for AY 2007-08. The first issue contested therein relates to addition of ` 74,12,287/- made on account of difference in work-in-progress. The facts relating to the same are stated in brief. During the course of survey operations, the revenue seized a paper wherein the value of work-in-progress as on 31.1.2007 was written in hand as ` 2,47,42,860/-. It was noticed that the value of work-in-progress was shown at ` 1,73,30,573/- in the books of account as on 31.1.2007. Thus there was a difference of ` 74,12,287/- between the two figures cited above. When this was confronted to the partner of the assessee-firm, he admitted that the difference is on account of miscalculation and agreed to offer the difference of ` 74,12,287/- as additional income. However, as stated earlier, the assessee did not offer the same in the return of income filed. Before the Assessing Officer, the assessee submitted that the value of work-in-progress was correctly reflected in the books of account. It was submitted that noting made in the loose sheet found during the course of search was rough calculation made to estimate bills that can be raised upon the clients, which shall include profit mark up and pending bills, i.e. bill remain to be accounted. It was submitted that the estimate was made in an adhoc
3 M/s. Kalparishi Construction Co. manner. The Assessing Officer was not convinced with the explanations and accordingly rejected the same on the following reasons :- a) It is an admitted fact that documents on the basis-of which, assessee offered additional income were found and impounded from assessee's premise. b) There is no denying of the fact that documents are in the hand writing of Mr. Ashok Jain partner in the assessee firm. Even in his reply dated 3.12.2009, assessee has re-confirmed this fact. c) The entire business is looked after by the two partners including Mr. Ashok Jain. The argument that Mr. Ashok Jain could not properly understand the phrase 'Work in Progress', is quite general and vague. The term 'Work in Progress' is quite common term used in builder contractor circles and its not a technical or complex phrase which could be misunderstood by the person, who is engaged in this line of business. d) The assessee offered additional income of Rs. 1,00,00,000/- on the basis of impounded documents, in his sworn statement. Even on the day of survey, assessee handed over post dated cheques to the Department to prove his sincerity in paying the due tax on surrendered amount. e) The survey action was carried out way back on 2.2.2007 and despite the lapse of more than 2 years and 10 months, it did not file any letter with the department to claim that surrender of Rs.74,12,287/- on account of difference in work in progress was wrongly made.
In absence of any such reply, the present contention of the assessee that impounded documents only contained estimated value of work done till 31.1.2007 and not the actual figure of work in progress cannot be accepted.
The Assessing Officer, by placing reliance on some case laws, expressed the view that the assessee did not retract from his statement within a reasonable period. Accordingly the Assessing Officer added the amount of ` 74,12,287/-, being the difference in the work-in-progress to the total income of the assessee. The Ld CIT(A) also confirmed the addition.
4 M/s. Kalparishi Construction Co.
5. The Ld A.R reiterated the submissions made before the tax authorities, while the Ld D.R supported the orders of tax authorities.
We have heard rival contentions on this issue and perused the record. We notice that the basis for making this addition is the loose paper found during the course of search, which read as under:- Work in Progress as on 31.01.2007 (valuation) Lokhandwala Construction 1,24,88,893 Veena Developers 11,36,105 Sanghvi Associates 62,97,784 K.Raheja (Infinity Developers) 87,29,672 Vasai Mall 1,24,710 Castle Construction 16,33,696 ---------------- 2,47,42,860 Closing stock 25,00,000 ----------------- 2,72,42,860 =========== In the books of account, the assessee has shown work in progress of various projects as under:- Lokhandwala Construction 87,47,561 Veena Developers 7,95,759 Sanghvi Associates 4,41,118 K.Raheja (Infinity Developers) 61,14,500 Vasai Mall 87,350 Castle Construction 11,44,285 ---------------- 1,73,30,573 ========= Since the partner of the assessee firm has admitted in the statement taken from him during the course of survey operations that the difference between the two figures shall be offered as income, the tax authorities have taken the view that the difference of Rs.74,12,287/- is assessable as income of the assessee. Thus, the tax authorities have placed their reliance fully on the statement given by the assessee.
We notice that the assessee has submitted that the noting made in the loose sheet represents the calculation made to determine the bills which can
5 M/s. Kalparishi Construction Co. be raised on the basis of valuation done in an adhoc manner. It was also submitted that the noted amount would include bills yet to be accounted and also the gross profit margin. The same was not acceptable to the tax authorities.
The “work in progress”, in a construction project, represents the value of work executed since the date of last bill to a particular date, which remain un- billed. Generally the exercise of ascertaining the value of “Work in progress” is carried out at the year end, since the books of accounts are required to be closed on that date. The work in progress in a construction project is akin to ‘closing stock’ in a business concern. The necessity to estimate the work in progress arises, since the profit/loss is required to be ascertained under “revenue cost matching” principle. The value of work in progress is generally ascertained by aggregating various expenses incurred since the date of raising of last bill.
9. We notice that the noting made in the loose sheet found at the time of survey operation, has been taken as representing the actual amount of work in progress on various projects executed by the assessee. However, we notice that the assessing officer has not examined the books of accounts and other materials in order to corroborate the veracity of the noting made in the loose paper, particularly when the assessee has offered explanations on the losse paper. The question of any excess investment shall arise only when the assessee has incurred expenses outside the books of accounts. We notice that the AO did not take any steps to ascertain as to whether the assessee has made investments in various projects over and above that was recorded in the books of accounts. We notice that the survey officials did not unearth any other document evidencing any unaccounted investment, other than the impugned loose paper. Under these set of facts, in our view, the AO should not have placed reliance only on the statement given by the assessee without corroborating the same with any other material.
6 M/s. Kalparishi Construction Co.
Another important feature is that the assessee is only a contractor and it executes various projects for its clients. Under normal circumstances, a prudent contractor would not be investing his own money more than required level, since there is no incentive in making excess investments as the projects are executed on behalf of other persons. If the projects are executed for its own use, then there is a possibility that a person may invest his unaccounted income. On the contrary, a contractor may, at the most, like to inflate the expenditure in order to reduce his profits, which is not the case here. Viewed from this angle, there is merit in the contentions of the assessee that the noting made in the loose sheet does not represent actual amount of work in progress, but the same represents estimate made, which would facilitate raising of bills to clients. Hence the explanation of the assessee that the noting made in the loose sheet would include gross profit as well as the value of pending bills, in our view, sounds reasonable. The tax authorities have taken the view that the assessee has not retracted from the statement given during the course of survey. However we notice that the assessee did not think of retraction, since it has explained the nature of noting made in the loose paper and has taken a stand that the partner has made admission without properly understanding the noting made in the loose paper, i.e., according to the assessee, the loose paper was incorrectly interpreted by the partner of the firm at the time of survey. In the absence of any other corroborative material and in view of the nature of business activities of the assessee as discussed above, we are of the view that there is no reason to reject the explanations furnished by the assessee in this regard before the tax authorities.
Under these set of facts, we are of the view that there is no justification in making this addition solely on the basis of a loose paper found at the time of survey operation, particularly when the contents of the loose paper were not corroborated with any other credible material. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of Rs.74,12,287/-, referred above.
7 M/s. Kalparishi Construction Co.
The next issue relates to the addition of Rs.24,73,000/- relating to unexplained investment made in the renovation and on purchase of furniture and fixture. During the course of survey operation, another loose sheet containing details of certain expenses was found. In the sworn statement, the assessee admitted the same to be the expenses incurred on account of renovation and on purchase of furniture and fixtures in the month of October, 2006 in cash. The assessee admitted that these expenses were not recorded in the books of account and accordingly agreed to offer the same as additional income. The assessee did not offer the same in the return of income. Before the AO, the assessee submitted that it has accounted all the expenses in its books of accounts and no part of expenditure remained unaccounted. It was further submitted that the expenses are being incurred by following standard procedures. The assessee also submitted that the auditors have audited the books of accounts and they have stated that the assessee has incurred expenses by way of cash to the tune of Rs.10,42,259/- attracting the provisions of sec. 40A(3) of the Act.
The AO noticed that the assessee has accounted the expenses after completion of survey operations. Since the expenses were not accounted in the books of accounts at the time of survey, the AO rejected the contentions of the assessee and accordingly added the amount of Rs.24,73,000/- as income of the assessee. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. There is no dispute that the loose paper contained details of expenses incurred towards renovation and towards purchase of furniture. The partner admitted the same as unaccounted items and accordingly agreed to offer the same as income of the assessee firm. At the same time, it is also an admitted fact that there was cash shortage of Rs.21,59,599/- found at the time of survey, i.e., as against the book balance of Rs.22,74,234/-, the assessee was possessing physical cash balance of Rs.1,14,635/-. The shortage in cash balance normally
8 M/s. Kalparishi Construction Co. represents expenses incurred outside the books or the bills remaining to be accounted. The assessee has taken the stand that the noting made in the loose sheets represents bills remaining to be accounted and accordingly accounted the same in the books of accounts. Since all the bills were dated prior to the date of survey and the assessee has also accounted the same prior to that date, the tax authorities have taken the view that the action of the assessee is an afterthought and accordingly rejected the said claim.
We heard the parties on this issue and perused the record. The fact remains that a cash shortage of Rs.21,59,599/- was found at the time of survey. The survey officials have also found a list of unaccounted expenses. Hence the assessee has contended that those expenses remained unaccounted at the time of survey, i.e., it was only a lacunae in accounting the expenses at the right time. Accordingly, the assessee has recast its books of accounts by incorporating the amount of Rs.24,73,000/- and accordingly claimed that there is no unaccounted items. We notice that the tax authorities have ignored the fact of cash shortage of Rs.21,59,599/-.
It is an undisputed fact that the noting made in the loose sheet contained expenses incurred in the month of October, 2006 and they were incorporated by the assessee only after the date of survey. It is also a fact that the survey officials have found cash shortage to the tune of Rs.21,59,599/-. Normally cash shortage would represent the expenditure incurred/investment made outside the books of accounts. Under these set of facts, we are of the view that the assessee may be given credit to the extent of cash shortage amount of Rs.21,59,599/-, since it may not be proper to ignore the fact of cash shortage, i.e., the expenses have been incurred to the extent of Rs.21,59,599/- by drawing cash from the books of the assessee, but they have not been accounted on the date of survey. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to give credit to the extent of Rs.21,59,599/-. Accordingly the remaining addition of Rs.3,13,401/- is hereby confirmed.
9 M/s. Kalparishi Construction Co.
The next issue urged by the assessee relates to the disallowance of expenses incurred on Shuttering materials treating the same as Capital expenditure. The assessee had claimed a sum of Rs.5,37,81,223/- as expenditure towards Shuttering materials. The AO treated the same as Capital expenditure and after allowing depreciation at 15%, he disallowed a sum of Rs.4.57 crores. The Ld CIT(A) noticed that the assessee has grouped various types of expenditures under the head “Shuttering Materials” and some of them are consumables and some does not have enduring benefit. Accordingly he directed the AO to delete the disallowance made on account of purchase of plywood, GI binding wire and misc. consumables. Still aggrieved, the assessee is challenging the decision of Ld CIT(A).
The AO has taken the cost of Shuttering material at Rs.5,37,81,223 and accordingly worked out the disallowance. However the assessee submitted before Ld CIT(A) the details of material consumed or purchased for shuttering purposes and the same was worked out at Rs.5,56,49,392/-. The assessee also explained the nature of each of items purchase/used for shuttering purposes as under:- “The breakup of the same as furnished by the AR is as under : Sr.No. Name of material Net amount (in ` ) 1 G.I. Wire 18,68,169.00 2 Shuttering material 2,72,93,566.00 3 Plywood/Silverwood 2,07,06,902.00 4 M.S. Angle, Sheets and Wire 57,80,755.00 5 Total 5,56,49,392.00
The AR has explained the nature of items purchased and its use in the business of the appellant, the same is reproduced hereunder :
Sr. Particulars Amount (in ` ) Remarks No . 1 Plywood and 2,07,06,902/- The plywood is used for laying the concrete firewood from below when casting of the same is done. One piece of plywood, at the most, can be used 6 to 8 times. However, builders
10 M/s. Kalparishi Construction Co. insisted that same plywood may not be used beyond 4 to 5 times. Thus the plywood consumption is comparable to any other consumable. Hence, the entire expenditure incurred on the same as revenue expenditure. 2 G.I. Binding 75,600/- G.I. binding wires used for fixing the Wire sheet/reinforcement of pillars/columns of the building. G.I. binding wires used in tying the pillars finally gets embedded in the concrete and thus, cannot be removed. Hence, the appellant cannot use it again and again. 3 G.I. Sheets 2,81,640/- G.I. sheets are used for covering the site and also making temporary structures for the labourers at site. Once utilised it cannot be utilized again as the same is cuploks used in one project cannot be used in other project. Thus, the cuplocks have no enduring life.
M.S. 37,61,418 M.S. Shuttering includes small items such Shuttering as Propos, span, H. Frame, Swivel couples, M.S. Pharma, Brassing and Shikanja. These items are used for giving support to the slabs. Some of the items are embedded in the concrete and some can be used two to three times in the same project. However, these shuttering material once used in one project cannot be again used in other project as it was used for providing particulars shapes. Thus, the M.S. Shuttering has no enduring life and appellant cannot derive an enduring benefit from these shuttering materials.
6. M.S. Pipe 49,77,718 M.S. pipes are used in the construction of scaffoldings. It gets imbedded in the structure and hence cannot be reused. Thus, the appellant do not get any enduring benefit by using M.s. pipes.
7. ISMP & ISMC 30,83,107/- ISMP & ISMC are used for giving support to the roofs and slabs. The appellant has used ISMP & ISMC in only one project for construction of “composite structure” of infinity. It gets embedded in the concrete and hence, does not have any enduring life.
8. Mechanical 2,80,750/- Mechanical springs are used for giving springs support to the slabs. It can be used two to three times in a particular project. However, it cannot be used in other projects as the same are cut in a particular size. Thus, it gives no enduring benefit to the appellant.
Misc. 5,00,000/- It requires during the period of construction Consumables of structure. Out of all items only few gets retrieved. However, it cannot be used again. Thus, it is not having any long life 10 M.S. Angles 57,80,775/- The expenditure debited under this head is 11 M/s. Kalparishi Construction Co.
Sheet with respect to angles and other M.S. sheet items which are used for shuttering. The appellant submits that these items do not survive beyond one project. Hence, the expenditure on account of the same is revenue expenditure. Total 5,56,49,392/- As stated earlier, the Ld CIT(A) held that the expenses incurred on purchase of plywood, GI binding wire and miscellaneous consumable are to be treated as revenue expenditure.
The Ld A.R submitted that the assessing officer had relied upon certain case law to treat the shuttering material expenses as capital in nature. He submitted that the dispute before the Hon’ble High Courts in those cases were as to whether the purchase of shuttering materials would qualify for 100% depreciation, since the cost of each component of shuttering material was less than Rs.5,000/-. He submitted that the Act had provided for 100% depreciation in those relevant period, if the cost of asset was less than Rs.5,000/-.
The Ld A.R submitted that the nature of usage and durability of shuttering materials are not identical to the one dealt with by the Hon’ble High Court. He submitted that the assessee has been constructing multiple storey buildings and hence the shuttering materials purchased by it are project specific, i.e., particular shuttering material is used for a project as per the requirements of the contractee. These materials are either consumed in the construction itself or will be worn out after completion of the project. Accordingly he submitted that the shelf life and usage period of the materials do not last longer and hence the tax authorities are not justified in presuming that the assessee would get benefit of enduring nature on purchase and use of shuttering materials. He submitted that the GI Sheets are used to make temporary sheds at the construction sites and the same would generally wear out upon completion of project making it difficult for 12 M/s. Kalparishi Construction Co.
reuse. Similarly he submitted that other materials also do not have longer life.
On the contrary, the Ld D.R submitted that the Shuttering materials have been held to be capital assets and hence the question of allowing depreciation there on came to be considered by Hon’ble High Court in the case of Harijan Evam Nirbal Varg Ayas Nigam Ltd (229 ITR 776)(All).
We have heard rival contentions on this issue and perused the record. During the year under consideration, the assessee has undertaken construction work of about 17,60,600 Sq.ft. The Ld CIT(A) has rightly held that the cost of GI wires, plywood and other consumable items cannot be treated as capital expenditure, since they get consumed in the construction.
The assessee has stated that the G I Sheets are used on construction of temporary sheds at the construction site and the cup locks, consisting of small items like Base plate, Verticles, Horizontal Ledger etc costing Rs.85/- to Rs.375/- each, are fully used up/consumed during the construction itself. The M.S shuttering material purchased is claimed to have a life of 8 – 10 months. They include small items such as Propos, Span, H frame, Swivel couples, M.S Pharma, Brassing & Shikansa. These items are used to support the slabs. It is stated that these items are generally used for three times in the same project. M.S Pipes are used in the construction of scaffoldings. It is stated that it gets imbedded in the structure and cannot be reused. ISMP & ISMC are used to give support to roofs and slabs and it is stated that they can be used only in one project. All other items are said to last only for one project only.
We find merit in the contentions of the assessee on considering the volume of work undertaken by the assessee. The shuttering materials are used to support the concrete structures till the time the concrete slabs are set. Since the shuttering materials are made of MS plates and pipes, which come in contact with water, cement etc., their durability would depend upon
13 M/s. Kalparishi Construction Co. the type and frequency of their usage. Since the assessee has undertaken contracts for construction of huge multi storeyed building, the assessee would be using the same on construction of every floor, i.e., the shttering materials are used several times within the same project itself. The assessee has claimed that these items are generally used for about three times. Even if it is presumed that they can be used for more number of times, there is merit in the contentions of the assessee that these items generally do not last longer than one project. For example, if the assessee is constructing 20 storied building, then these materials shall be used more than 20 times in the same project, in which case, it is inconceivable that the same would be capable of being used in another project after using them for about 20 times.
The usage of an asset and the period for which the benefit derived is derived there from would generally determine the nature of expenditure. If the benefit is expected to be derived for sufficient period extending for more number of years, then the same may be categorized as Capital expenditure. The period for which benefit would be derived from usage of an asset would depend upon the nature of usage. In the instant case, it is seen that the assessee is undertaking contracts for construction of multi storoyed buildings, meaning thereby, these materials would be used again and again for construction of each of the floor. Hence there is merit in the contentions of the assessee that these materials would generally be useful for one project or for about one year only. Thus the longevity of these materials does not long last in the hands of the assessee, in view of the nature of business carried on by it. Hence, we are of the view that the cost of shuttering materials should be treated as revenue expenditure in the hands of the assessee. Accordingly we find merit in the contentions of the assessee that the cost of shuttering materials should be treated as revenue expenditure, in the facts and circumstances of the case. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of the assessee.
14 M/s. Kalparishi Construction Co.
The last issue urged in the appeal relating to AY 2007-08 is the addition made by the Ld CIT(A) on alleged sale of scrap. Since the Ld CIT(A) directed the AO to delete the disallowance made on account of purchase of plywood, GI binding wire and misc. consumables, he took the view that the value of scrap sales of Rs.10,88,409/- declared by the assessee should be enhanced. Accordingly he estimated the value of scrap at 15% of Rs.2,07,06,902/- (cost of plywood/seawood), which worked out to Rs.31,06,305/-. The assessee is contesting the enhancement so made by the Ld CIT(A).
We heard the parties on this issue and perused the record. The Ld A.R contended that the Ld CIT(A) has enhanced the amount of actual scrap sales without brining any supporting material, i.e., on the basis of presumptions. On the contrary, the Ld D.R supported the order passed by Ld CIT(A). However, we find merit in the contentions of the assessee, since the Ld CIT(A) has made enhancement purely on presumptions without any material. Accordingly we set aside the enhancement made by Ld CIT(A).
In AY 2008-09, the assessee is contesting the following issues:- (a) Disallowance of expenditure incurred on Shuttering materials. (b) Disallowance of transportation charges (c) Disallowance of labour expenses.
At the time of hearing the Ld A.R did not press the grounds relating to disallowance of transportation charges and labour expenses. Accordingly the grounds relating to the same are dismissed as not pressed.
The surviving issue relates to the disallowance of expenditure incurred on shuttering material. We have considered identical issue in the earlier paragraphs while dealing with the appeal of the assessee relating to AY 2007-08 and we have held that the same should be treated as revenue expenditure in the hands of the assessee, in the facts and circumstances of the case. Consistent with the view taken therein, we set aside the order
15 M/s. Kalparishi Construction Co. passed by Ld CIT(A) in AY 2008-09 on this issue and direct the AO to allow the expenditure on shuttering material treating the same as revenue expenditure.
In the result, both the appeals of the assessee are partly allowed.
Order has been pronounced in the Court on 26.10.2016